The U.S. Supreme Court will consider freeing state and local governments to collect billions of dollars in sales taxes from online retailers, agreeing to revisit a 26-year-old ruling that has made much of the internet a tax-free zone.

Heeding calls from traditional retailers and dozens of states, the justices said they’ll hear South Dakota’s contention that the 1992 ruling is obsolete in the e-commerce era and should be overturned.

State and local governments could have collected up to $13 billion more in 2017 if they’d been allowed to require sales tax payments from online merchants and other remote sellers, according to a report from the Government Accountability Office, Congress’s nonpartisan audit and research agency. Other estimates are even higher. All but five states impose sales taxes.

Online retailers Wayfair Inc., Overstock.com Inc. and Newegg Inc. are opposing South Dakota in the court fight. Each collects sales taxes from customers in only some states.

The case will also affect Amazon.com Inc., though the biggest online retailer isn’t directly involved. When selling its own inventory, Amazon charges sales tax in every state that imposes one, but about half of its sales involve goods owned by third-party merchants. For those items, the company says it’s up to the sellers to collect any taxes, and many don’t.

The court probably will hear arguments in April with a ruling by the end of its nine-month term in late June.

‘Physical Presence’

The high court’s 1992 Quill v. North Dakota ruling, which involved a mail-order company, said retailers can be forced to collect taxes only in states where the company has a “physical presence.” The court invoked the so-called dormant commerce clause, a judge-created legal doctrine that bars states from interfering with interstate commerce unless authorized by Congress.

South Dakota passed its law in 2016 with an eye toward overturning the Quill decision. It requires retailers with more than $100,000 in annual sales in the state to pay a 4.5 percent tax on purchases. Soon after enacting the law, the state filed suit and asked the courts to declare the measure constitutional.

“States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike,” South Dakota said in its Supreme Court appeal.

Wayfair, Overstock and Newegg said the court should reject the appeal and leave it to Congress to set the rules for online taxes.

Expressing Doubts

“If Quill is overruled, the burdens will fall primarily on small and medium-size companies whose access to a national market will be stifled,” the companies argued. “Congress can address this issue in a balanced and comprehensive manner through legislation.”

Those supporting South Dakota at the high court include 35 other states, as well as lawmakers who say they’ve been trying for years to get Congress to address the issue.

Overturning Quill would mean "leveling the playing field for businesses who are employing people on Main Street," Senator Heidi Heitkamp, a North Dakota Democrat, said in an interview. Heitkamp was North Dakota’s tax commissioner during its unsuccessful fight for taxing power in the Quill case.

The National Retail Federation, which represents both brick-and-mortar and Internet-only sellers, said it was encouraged by the court’s decision to get involved. “We are hopeful it will lead to a positive outcome that reflects the realities of 21st century commerce,” the trade group’s president, Matthew Shay, said in a statement.

Three current justices -- Clarence Thomas, Neil Gorsuch and Anthony Kennedy -- have expressed doubts about Quill. Kennedy said in 2015 that Quill had produced a “startling revenue shortfall” in many states, as well as “unfairness” to local retailers and their customers.

“A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier,” Kennedy wrote. “It should be left in place only if a powerful showing can be made that its rationale is still correct.”

Gorsuch, the newest Supreme Court justice, suggested skepticism about Quill as an appeals court judge. And Thomas has said he would jettison the entire dormant commerce clause, saying “it has no basis in the Constitution and has proved unworkable in practice.”

Amazon backs a nationwide approach that would relieve retailers from dealing with a patchwork of state laws. Amazon once relied on the Quill ruling and didn’t collect sales tax at all; the company gradually changed its position as it built warehouses all over the country, giving it a greater physical presence in multiple states.

The case is South Dakota v. Wayfair, 17-494.

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— With assistance by Spencer Soper

(Updates with reaction from Heitkamp, retail trade group starting in 13th paragraph.)

Published on
January 12, 2018, 2:46 PM ESTUpdated on January 12, 2018, 5:11 PM EST